USD: Price action is going to be instructive - ING

The value of currencies in FX markets is typically driven by interest rate differentials, with FX effectively being seen as an extension of monetary policy. That is why the US Dollar did so well from 2021 onwards on the back of relatively tight Federal Reserve policy and then the US exceptionalism story over the last couple of years, ING's FX analyst Chris Turner notes. 

USD price action remains on the softish side

"With so much uncertainty about the current US administration's policy, we in the market are on the lookout for new narratives. For example, could FX reserve managers who hold close to $13tr in reserves be considering reducing their dollar composition? But in the meantime, could the ongoing rally in gold be telling us something about investor preferences away from the dollar? It will also be interesting to keep track of the weekly releases from the Fed in terms of the marketable holdings of US Treasuries that the central bank keeps in custody for foreign accounts."

"USD price action remains on the softish side. The announcement of auto tariffs on Wednesday has not given the dollar a material lift, and we want to see how the dollar trades today, when we should get some mildly positive dollar data. Here, the expectation is that today's US core PCE deflator remains at a sticky 0.3% or even 0.4% month-on-month, suggesting the Fed's pause in easing could extend further. Currently, the market prices 17bp of rate cuts in June - something which could be priced out should inflation remain sticky." 

"In theory, that would help short-dated rates and the dollar - but as above, larger forces may be at play. DXY risks an intra-day run-up to 104.70, and an outside risk to 104.90 on today's inflation data. But the mood music in the market is that unless reciprocal US tariffs really shock next Wednesday, investors look minded to sell the dollar".